Axsome: Implications of Recent Biotech Deals (NASDAQ:AXSM) | Jobi Cool


Parradee Kietsirikul

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Myovant

You get recessions, you have stock market declines. If you don’t understand that it’s going to happen, you’re not prepared, you’re not going to do well in the markets. – Peter Lynch

Author’s note: This article is abridged version of an article originally published for members of the Integrated BioSci Investing market on October 27, 2022.

As you can see, there has been a lot of biotech buying in recent months. Among them are AVEO Oncology (AVEO), Myovant Sciences (MYOV) and Akouos (AKUS). You can appreciate that analyzing mergers and acquisitions (M&A) is both interesting and potentially very profitable. Aside from intellectual curiosity, a company is usually acquired for a substantial acquisition fee. In other words, you can see your stock typically rise more than 40% if there is news of an upcoming deal.

Due to recent macroeconomic factors such as hyperinflation, the M&A environment will be highly conducive to more transactions. Of the many companies I value, I believe that Axsome Therapeutics (NASDAQ:AXSM) is likely to be obtained. In this study, I will present a fundamental analysis of the M&A landscape while focusing on Axsome.

AXSM chart

Stock charts

Figure 1: Axome Chart

Larger M&A environmental deals

To evaluate past deals and predict future acquisitions, you should first analyze the current M&A environment. Interestingly, Fiscal 2022 is an ideal year for more acquisition activity due to the current Corona Bear market. That is to say, macroeconomic factors cause great uncertainty and thus increase market fear. As a result, investors are fleeing the stock market in droves, which created excellent bargain opportunities for sophisticated investors and larger cash-strapped companies with long-term investment horizons.

As you can imagine, the aforementioned macroeconomic factors include pandemic-related supply chain constraints, rising interest rates, falling home prices, the looming recession, and hyperinflation. As a common denominator (COVID-19) hits all countries around the world. Therefore, it stands to reason that you are seeing rising inflation around the world as shown below.

hyperinflation

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Figure 2: Hyperinflation

Sumitomo acquisition of Myovant

Switching gears, let’s walk through some recent purchases. Notably, Myovant Sciences is an emerging dynamic innovator of new therapies for women’s and men’s health with high unmet needs. The licensed drug (relugolix) is already approved and marketed for various conditions: advanced prostate cancer in men as well as endometriosis/endometriosis in women. As a novel oral gonadotropin-releasing hormone (GnRH) receptor antagonist, relugolix provides excellent safety/efficacy while being convenient for patients. Simply put, the drug does not need to be injected like competing molecules.

Apart from the macroeconomic factors, there are several variables that enticed Sumitomo (ie the majority shareholder) to buy Myovant. One reason is that the convenient oral pill gives relugolix a market advantage. Second, sales of relugolix have been increasing exponentially year after year since its launch. Third, Myovant has world-class partners such as Pfizer ( PFE ) who can fully unlock the value of relugolix.

pipeline

Myovant

Figure 3: Myovants pipeline

If you put all the above factors together, you can see that it made sense for Sumitomo to buy Myovant: a growing drug company on the way to becoming a blockbuster. Initially, Sumitomo made what I believed to be a “low-ball” offer of $22.75 which Myovant’s board rightly rejected. Contrary to conventional wisdom, I predicted that Sumitomo would “up the bid” to appease the board. I noted in a previous article,

With Sumi expressing a lot of interest in Myovant, you can bet they won’t give up. That explained why Sumi kept building more shares over time to become the majority shareholder. Looking ahead, the most reasonable next step is for Sumi to come back with a higher offer.

As it turned out, it didn’t take long for Sumitomo to come back to raise the offer to $27.00 per share. As you know, the board agreed to proceed with the contract. As you saw, it pays to “read the tea leaves” in M&A situations where the deal is temporarily stalled, like the one with Myovant.

LG Chem acquisition of AVEO

Besides Myovant, AVEO Oncology is another interesting company that was recently acquired. As an oncology specialist, Aveo’s lead drug is known as tivozanib which is marketed under the brand name Fotivda for renal cell carcinoma (ie RCC) both in the US and worldwide. I shared in the previous study,

Expanding its business footprint in North America, LG Chem is set to acquire Aveo for $566M. At that price, LG Chem would buy Aveo for $15.00 per share, or my estimate of 5X forward earnings. As Aveo reported, the deal would be executed in cash.

At that price, you can see that the deal is at a 43% premium to the Aveo’s market valuation on October 17th. At the 30-day moving average, it would be 71% higher. Even at that premium, you can see in the chart below that Aveo shares are still well below their previous highs.

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Aveo

Figure 4: Aveo’s pipeline

In addition to making deep acquisitions, you can see that LG Chem wants to expand its reach in the global market. And owning a company like Aveo would give it a strong presence in the US market. Besides Fotivda, you can understand that Aveo’s pipeline is also quite deep with ficlatuzumab AV-380, -203 and -353. As the year progresses, you can expect LG Chem to benefit greatly from these molecules as well as Fotivda’s various label extensions.

Lilly to buy Akouos

October has been a hot month for M&A because Eli Lilly ( LLY ) is also looking to buy Akouos for $12.50 per share, plus one contingent value right (ie CVR) of up to $3.00 per share. As you know, the bear market depressed Akouos’ stock price significantly below the previous high in 2021 (ie $26.34).

Akouos is a promising gene therapy company focused on ophthalmology (ie eye diseases) that are considered rare (ie orphans). By definition, an orphan disease has fewer than 200,000 cases annually. As you can appreciate, orphan drugs are reimbursed approximately $150K annually to offset the expensive and lengthy innovation process (in a space that lacks innovation).

In my opinion, Lilly bought Akouos because its pipeline is very focused on orphan situations. In addition, I believe Lilly likes the fact that Akouos is very specialized in rare eye diseases. And specialization usually produces strong data results. Another point is that Akouos uses the adeno-associated virus (AAV) vector which I believe is excellent for gene therapy. After all, the entire backbone of another gene therapy company, Regenxbio ( RGNX ), rests on AAV.

pipeline

Akouos

Figure 5: Akouos pipeline

More purchases to come

Based on a report from the Big Four accounting firm (ie PwC), you are likely to see more offers in the second half of this year. And it’s true because among many other acquisitions you saw three deals that I showed. Maybe more are coming. Regarding the PwC report,

All the stars are aligned for there to be a lot of bidding activity in all areas of the sector despite a slow start to the year so far. Many big drugmakers are strapped for cash (especially those with COVID-19 treatments in their arsenal), biotech prices have been normalizing after years of a bull market, and the 2025 patent cliff is fast approaching, all creating a strong deal environment.

2022 offer

PwC

Figure 6: Prominent offers in 2022

Top contender: Axsome Therapeutics

As my top buy, Axsome Therapeutics is a growing innovator in psychiatry. Like the cream that always rises to the top, Axsome dispelled market doubts to get FDA approval for its lead license known as AXS05. As a new/differentiated drug, AXS05 is marketed under the brand name Auvelity for major depressive disorder (ie, MDD).

Not satisfied with initial results, Axsome expands Auvelity’s Alzheimer’s and smoking label. There are also other very promising drugs such as AXS07, -12 and -14. Besides biomolecules, Axsome recently acquired Sunosi from Jazz Pharmaceuticals ( JAZZ ). As such, there are now two commercialized products with an extensive pipeline with aggressive development.

pipeline

Axsome

Figure 7: Axsome’s pipeline

At $41.96 per share (that’s a market cap of $1.69B), Axsome is an ideal buy for a large company looking to deepen its psyche. Interestingly, I believe Jazz would benefit from bringing Auvelity to market. As a specific treatment for MDD, Auvelity has demonstrated efficacy even in treatment-resistant depression. It is a feat that very few drugs can achieve.

Potential risk

Since investment research is an imperfect science, there are always risks associated with your stock, regardless of its fundamental strengths. More importantly, the risks are “dependent on the growth cycle.” At this stage in the growth cycle, all of the aforementioned companies (Aveo, PDS and Akero) are at risk of their future data reporting (either from key indicators or label expansion) not being positive. As such, their potential purchase would be significantly discounted for the buyer. The risk of creating pipeline synergies is also very high. Very few acquisitions are truly synergistic. Nevertheless, value addition is the best a company is likely to get.

As far as investors are concerned, your risk that none of these companies would be acquired is very high. At the end of the day, M&A efforts are predictably low-achieving. Sometimes the deal might fall through. In that case, a company already involved in an M&A discussion would see its stock drop rapidly.

Conclusion

All in all, I strongly believe that you are going to see more M&A activity heading into the end of the year and into 2023. It appears that all the stars are aligned for more deals going forward. The strongest factor contributing to more deals is a very favorable M&A environment. Now it’s a buyer’s market that favors larger drugs with strong balance sheets.

Of all the companies, I believe Axsome has the best chance of being selected for the reasons I mentioned above. Even without being bought out, the company is likely to grow organically to become a much larger operator in the future.



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